21 May 2015

ESOS - seize the opportunity now

As highlighted in a previous edition of Private Equity Comment, the Energy Savings Opportunity Scheme (ESOS) implements into UK law the requirement in the EU's Energy Efficiency Directive for all "large enterprises" to carry out an energy audit at least every four years. It catches corporate groups containing a "large undertaking" (one with at least 250 employees or an annual turnover exceeding €50 million and an annual balance sheet total of €43 million) and it raises some real issues for private equity portfolio companies. And depending on the fund structure, it could have implications for the fund itself, the general partner and the manager if they are deemed to be in the same group as a large undertaking.

It may seem like the deadline is still in the distant future - any entity that qualifies for ESOS must notify the Environment Agency of their compliance by 5 December this year – but a lot of work may be required before then. An analysis of a fund's organisational structure will mean obtaining financial and employee information from portfolio companies. And unfortunately whether or not a fund or portfolio company qualified for the CRC Energy Efficiency Scheme will have no bearing on whether it qualifies for ESOS, as the qualification criteria are, rather unhelpfully, different.

For a fund that qualifies for ESOS the decision to be made is whether or not to "disaggregate" its portfolio companies so all entities participate as independent participants, which seems like an easy decision to make. But disaggregation will need to be agreed in writing between the fund and each portfolio company, and the Environment Agency has been clear that disaggregation is not a means of exempting organisations that would otherwise have qualified for ESOS, but a means of simplifying compliance for organisations that do. A disaggregated fund will not only have to remind small and medium sized portfolio companies that they will still need to comply due to there being a large undertaking somewhere in the group, but may also need to carry out the somewhat absurd tasks of confirming that they have no energy consumption, engaging an accredited "Lead Assessor" to verify that fact, and notifying the Environment Agency of their compliance through an online reporting system.

Fund managers, if they are in the same group as their funds or because they qualify themselves as a "large undertaking", may also have to consider their own energy consumption. Unlike the CRC Energy Efficiency Scheme, where landlords in multi-let buildings are generally responsible for reporting on their tenants' energy consumption, with ESOS, if the tenant's energy consumption is measured or can be "reasonably estimated", then it is the tenant's responsibility.

As ESOS implements a European Directive, all Member States of the EU will have similar legislation to ESOS, and fund managers with offices and portfolio companies throughout Europe will have to navigate different legislation and work out a compliance programme in each jurisdiction. With more and more regulation of the funds industry coming out of Brussels, this is yet another item to add to a compliance manager's checklist.

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
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